When the poor buy the rich new evidence on wealth effects of cross border acquisitions

This paper contributes to the current literature on cross-border M&A CBMA by focusing on the long-term effects of this event on the bidder’s stock return in emerging markets.. While much

Article

When the Poor Buy the Rich: New Evidence on

Wealth Effects of Cross-Border Acquisitions

Hong-Hai Ho 1 , Thi-Hanh Vu 2 , Ngoc-Tien Dao 3 , Manh-Tung Ho 4,5, * and

Quan-Hoang Vuong 4,5,6, *

1 Faculty of Finance and Banking, Foreign Trade University, 91 Chua Lang Street, Hanoi 100000, Vietnam; hai.ho@ftu.edu.vn

2 Institute of Economics and International Business, Foreign Trade University, 91 Chua Lang Street,

Hanoi 100000, Vietnam; hanhvt@ftu.edu.vn

3 Institute of Economics and International Trade, Foreign Trade University, 91 Chua Lang Street, Hanoi 100000, Vietnam; dntien@ftu.edu.vn

4 Center for Interdisciplinary Social Research, Phenikaa University, Yen Nghia, Ha Dong District,

Hanoi 100803, Vietnam

5 Faculty of Economics and Finance, Phenikaa University, Yen Nghia, Ha Dong District,

Hanoi 100803, Vietnam

6 Centre Emile Bernheim, Université Libre de Bruxelles, 50 Ave F.D Roosevelt, 1050 Brussels, Belgium

* Correspondence: tung.homanh@phenikaa-uni.edu.vn (M.-T.H.); hoang.vuongquan@phenikaa-uni.edu.vn or qvuong@ulb.ac.be (Q.-H.V.)

Received: 30 May 2019; Accepted: 18 June 2019; Published: 19 June 2019






Abstract: The growing trend of merging and acquisition (M&A) investments from emerging to developed market economies over the last two decades motivates the question on the long-run effects

of M&A on the wealth of emerging markets This paper contributes to the current literature on cross-border M&A (CBMA) by focusing on the long-term effects of this event on the bidder’s stock return in emerging markets To address the challenges of finding an accurate measure for the effects, this study applies the propensity score matching framework in tandem with difference-in-differences (DID) on a comprehensive dataset over the 1990–2010 period The analyses show evidence of systematic detrimental impacts of cross-border M&A on shareholders’ welfare in the long run, to a certain extent, diverging from the existing literature, which mainly highlights the positive effects for certain types of M&A The striking finding is that such strong negative effects remain persistent even when various factors previously known as capable of suppressing underperformance are considered Our study is in line with the growing landscape of cross-border mergers and acquisitions from the

“poor” to the “rich” countries

Keywords: M&A; wealth effects; propensity score matching; emerging markets

1 Introduction

With the arrival of Industry 4.0 and the shifting landscape of entrepreneurial finance in recent years, cross-border mergers and acquisitions (CBMA) have recorded growth in both values, as well

this development is the embedded growth of international acquisitions from emerging to developed countries By 2013, the number of deals made by emerging-market companies had accounted for 37%

of the world market for cross-border deals, having recorded annual double-digit growth from 2000

countries is often driven by the advanced technology, brand names, and natural resources of target firms

J Risk Financial Manag 2019, 12, 102; doi:10.3390/jrfm12020102 www.mdpi.com/journal/jrfm

(Cogman et al 2015;Deng 2013;Deng and Yang 2015;Lebedev et al 2015) While much of the M&A literature has shed light on various aspects of CBMA (e.g., the motivation, the strategic implication, and the market reaction), it is surprising that little is known about the wealth effects of M&A events on the acquiring firms in emerging markets Given that firms from emerging and developed markets face

and Huang 2017;Chari et al 2009;Young et al 2008), extending the literature on the wealth effects

of acquirers from less-developed markets could consolidate the current cross-border M&A trend,

This paper aims to bridge the gap in the literature concerning the long-term effects of CBMA events

on the bidder’s stock return in emerging markets One of the challenges in the long-run study is the

event is traditionally measured as the difference between observed return and the estimated return using

a market (i.e., single index) model While such a method is acceptable in the short-run study, as the firm risk is relatively stable, it is fundamentally flawed for long-run investigation, because the genuine effect

of the CBMA event cannot be isolated from the organic growth of the firm in the course of months or years, resulting in bias estimates (Jensen and Ruback 1983) Alternatively,Barber and Lyon(1997),Spiess and Affleck-Graves(1995), andLoughran and Ritter(1995) used a matching method that benchmarks

the observed return against the return of the matched firm (firm having similar size and market-to-book).

Essentially, this method trades off the assumption that the firm risk stays unchanged after the M&A event (i.e., market model) with the assumption that firms with similar ex-ante characteristics yield the same ex-post return It is possible to improve the accuracy of the latter method by matching firms upon several characteristics with a propensity score matching (PSM) model Even though PSM allows for multi-dimensional matching, it is still vulnerable to temporal time-invariant and unobservable selection bias Such bias, however, could be fixed when combing PSM with a difference-in-differences (DIDs) estimation technique (Blundell and Dias 2000;Girma et al 2003) As a result, this paper employs DIDs in tandem with PSM to answer the following research questions:

RQ1: What are the long-term wealth effects of CBMAs on shareholders’ return in emerging markets? RQ2: How would the wealth effects change when controlling for factors such as related industry, payment method, acquisition for control, prior experience, and structure break, which are known to have positive impacts on the outcome of M&As?

2 Literature Review

2.1 The Wealth Effects of CBMA of an Emerging-Market Acquirer

Within the extant finance literature, findings remain inconclusive over whether such acquisition

a meta-analysis on M&A and documented series of significant evidence that the value of bidding firms tends to decline over several years after the M&A However, the evidence of negative long-run abnormal return disappears when certain types of acquisitions are taken into consideration For instance,

Sudarsanam and Mahate(2003) andMitchell and Stafford(2000) find cash-financed outperforms

show that hostile bids generate better value to acquirers than friendly bids in a three-year event

of a listed target yields a higher return than taking over a private target in the long run Recently,

Bhabra and Huang(2013) found strong evidence of improved shareholder value over three years

following the M&A, especially for transactions involving state-owned enterprise, payment in cash, domestic target, and related industry The mixture of evidence suggests that the wealth effect is contingent on the characteristics of the acquirers, the transactions specifics, and the environment settings Such conditions vary among groups of acquirers Therefore, it is unlikely to generalize the findings in developed countries in the emerging counterparts, despite the abundance of studies found

in the former nations

2.2 The Characteristics of M&A from Emerging to Developed Markets

The agency problem arises from moral hazard and information asymmetry, and it is often cited as one of the major drivers of all strategic managerial decisions, including M&A (Jensen and Meckling 1976)

In emerging countries, the managerial entrenchment could be more severe because of their particular ownership structure In China, for example, large bidders are often controlled by the Government, who has the right to assign a chief executive officer (CEO) However, CEOs in the state-owned enterprises are normally rooted from political connection, hence enjoying protection in exchange for offering lucrative opportunities to government agencies (Faccio 2010;Luo 2001;Sheng et al 2011;Sun et al 2012) Such a

because a large portion of emerging-market firms is small- and medium-sized, often controlled by

often operates on a unique design, which has proven successful in the domestic market for generations CBMA to more advanced markets dominated by large enterprises might lead to a change in such a

These factors are frequently referred to as detrimental to shareholders’ wealth Thus, given the distinctive state ownership and dominant family holding, the wealth effect might be different between emerging and developed markets

Dunning et al.(2007) argued that international expansion via M&A requires certain proprietary advantages to create synergies such as ownership, location, and internalization (i.e., eclectic paradigm) While developed-market acquirers normally have access to privileged technology, high-end markets, and superior management skills, an emerging-market counterpart owns a different set of advantages, namely the ability to gather a huge low-cost labor force on short notice or the capability of dealing

synergies, but also different motivation for emerging-market acquirers For example, the acquisition of intangible assets such as patents, trademarks, brand name, and distribution network in the developed

Deng 2004;Grimpe and Hussinger 2009;Guillén and García-Canal 2009) The differences in synergy and motivation should reflect in the ex post performance of the CBMA transaction

2.3 Determinants of CBMA Wealth Effects in Emerging Markets

2.3.1 Industry Relatedness

Industrial relatedness has been widely debated in finance and strategic management literature Several studies argue that acquiring related target (firms having the same Standard Industrial Classifications (SIC) code to acquirer’s) could create both operational synergies by removing duplicates,

acquisition should create higher value to shareholders than unrelated (i.e., conglomerate or diversifying) acquisitions By contrast, diversification may entail a low cost of borrowing or the flexibility of the

diversification and found that a lower level of earnings volatility and financial distress are the most important drivers of CEO diversification decision

Besides, the business model of a diversified firm, organized as a set of interlinked operational units financially controlled by a hub, embeds an internal capital market Allocation of the fund through such a convenient tunnel reduces financing frictions, enhancing the financial capability, and allowing for a higher level of investment (Stein 2003) However, the privilege of the internal capital

(Lien and Klein 2008)

The existing empirical evidence on the performance of related mergers and acquisitions seems to

reaction to the announcement of a firm’s plan to refocus, whileServaes(1996) andLang and Stulz(1994) find that diversified firms are traded at a discount On the contrary, some studies find evidence rejecting

that the causal relationship between diversification and undervaluation is spurred by common factors

Villalonga(2004)

which either favor the internal capital market privilege or indicate that emerging-market acquirers

case is possible as the markets for corporate control in emerging countries are still in the infant stage, and the pioneer acquirers can still grasp the “low hanging fruits” Nonetheless, such opportunities should soon deplete, given the recent “tsunami” of outward investments from emerging nations 2.3.2 Method of Payment

Paying for the target with cash or with stock or anything in between is not a concern if the market

is theoretically efficient, as all existing information fully reflected in current stock price would eliminate the abnormal return of any news announcement In effect, the empirical evidence documents the

and Vijh 1997;Mitchell and Stafford 2000;Rau and Vermaelen 1998) The underlying signaling theory assumes market inefficiency, and hence each party to the M&A transaction generally seizes private information unavailable to the counterparty and the public In such an asymmetric environment, the cash-financed acquisition announcement signals the acquirer’s share being undervalued, while the

adjustment toward the payment method in the announcement underpins a substantial movement in the market, causing significant abnormal return, not only in the short run, but also several years after

Also, the classic market microstructure literature establishes that stock price and liquidity are

encounter a lower trading cost, and informed traders might extract extra return at the expense of the

that in an emerging country should possess more private information, which helps them extract even more benefit from the less informed targets Thus, we expect a stronger positive wealth effect in a cash-financing transaction in emerging than in developed countries

2.3.3 Power of Control

The controlling ownership of target is crucial in cross-border acquisitions, as the target’s management would otherwise take advantage of the incomplete contract and refrain from sharing strategic resources such as technology or management expertise Control rights also entitle acquirers

that acquirers are likely to be undermined by the target’s “opportunistic and distortionary” behavior unless the residual control right is attained The empirical evidence, indeed, supports this argument,

asChari et al.(2009) find that control is the key element of positive abnormal return If the control is not

even attempted to measure the corporate control premium, reporting that such a premium ranges from −4% (in Japan) to +65% (in Brazil) Such evidence demonstrates that the value of the control is higher in less developed countries Thus, this paper expects positive effects of control ownership in the long run

2.3.4 Prior Experience

An acquirer having prior experience in corporate control in developed markets can reduce the

of the foreign country such as institutional characteristics could reduce the cultural barrier on both

previous encounters increase the chance of success for serial acquirers However, it is not necessarily

that historical successes invoke managerial hubris, which clouds the manger’s judgments in subsequent

evidence for the hubris hypothesis that experienced acquirers entail higher systematic risk Consistently,

Al Rahahleh and Wei(2012) find that firms undertaking frequent M&A also suffer from declining return The inconsistent evidence suggests a rather unpredictable behavior of prior acquisition experience in the emerging market

2.3.5 Structural Break

Mergers and acquisitions appear to occur in waves, each of which is characterized by a different

their merger sample based on two periods and statistically verify the difference in wealth effects with

pairwise t-statistics, which supports the necessity for the consideration of structural break in M&A

depicts that the M&A market was virtually nonexistent before the 1990s, however, the gradual financial liberalization attracts a rapid growth of participants

In summary, the widely accepted view on the value destruction of M&A in developed nations appears uncertain in emerging countries, as existing theories and evidence are inconsistent Some factors affecting acquisition performance such as ownership structure, government involvement, and institutional and corporate governance development in emerging countries behave differently in a different setting, which makes the answer on long-term wealth effects less predictable in the emerging world

3 Data and Methodology

3.1 Data

3.1.1 Data Sources

The M&A events from emerging to developed countries are collected from the Thomson One database, for 20 years, from 1990 to 2010, a period right before the dawn of Industry 4.0 The data include characteristics of the deal, country, and industry specifics Initially, the total number of M&A deals reach nearly 140,000 However, the final sample drops to 281 after screening out all the missing

specifics and return data are extracted from World Scope, thereby each acquiring firm is matched against a whole set of all available listed firms in the corresponding country For example, to find the wealth effects of a cross-border M&A for each Indian acquirer, we collect from WorldScope the data on size, market-to-book, and cash holding level along with Datastream’s return indices of all

non-acquirer listed firms in India (more than 5000 firms) in the following five years to yield the optimal result The total non-acquiring firms used for matching across the sample is 35,651, which makes our sample larger than most samples documented in the literature These steps are carried out together with 20 years of data on M&A to ensure the reliability and representativeness of the wave of M&As from emerging to developed markets explored in this paper

Table 1.Full sample overview

Target Country Acquirer Country Number of Deals

* 281 is the final sample after screening out the missing data.

Figure 1.Number of deals by year (Source: study sample)

3.1.2 Sample Description

This section goes into a detailed description of the sample The breakdown of the sample by

CBMA to developed countries, while the U.S is the top receiving country, as expected Outbound M&A from an emerging to a developed country is a new trend, as less than 15 deals have been reported every single year until 2000 The frequency starts to pick up rapidly after 2000 and reaches a peak

in 2008 A year after that, deals dropped dramatically, perhaps due to the financial crisis, which

that non-cash payment is dominant to cash payment, even though non-cash payments, as discussed earlier, imply ex-post underperformance Other than that, the sample structure is consistent with our expectation More specifically, related acquisition, acquisition for control, and inexperienced bidder are all dominant forces

Table 2.Distribution of merger and acquisition (M&A) events by country (Source: authors’ calculations).

Bidder Country Frequency Percent Target Country Frequency Percent

Table 3.Breakdown of the sample by categories

Acquisition for control Less than 50% of the target’s shares acquired 75 27.47

More than 50% of the target’s shares acquired 198 72.53

Prior acquisition experience Inexperienced bidder 190 67.62

3.2 Methodology

The long-term wealth effect is estimated with the propensity score matching (PSM) model in tandem with differences-in-differences (DIDs), a quasi-experimental method attempted to replicate

framework finds a counterfactual firm based on an ex-ante set of specific characteristics In this paper, we assume that firms sharing a similar size, market-to-book, and cash level are subject to the

and French(1993), whileJensen(1986) argues that cash level is a crucial determinant of acquisition

firms into detrimental acquisitions Besides the three conditioning variables, we also control for country and industry fixed effects The PSM model specification is presented in Equation (1)

Prob(Acquirer i =1) =αi+βi X i+γi+δi+εi, (1) where

Prob(Acquier i=1): The probability of an emerging-market firm engaging in CBMA in developed markets

γi: Control for country fixed effects

δi: Control for industry fixed effects

εi: The error term

αi: The intercept

Given its advantage of multidimensional matching, the PSM alone is under scrutiny because it fails to account for the longitudinal nature of the sample where the return is observed at two different

of the event study, thereby capable of reducing selections on observables and “temporal time-invariant”

is given in Equation (2)

DIDs= 1

n1

n1

X

i∈T











Y 1t1i − Y 1t0i



−

n2

X

j∈C

W(i, j)(Y 0t1j − Y 0t0j)









where

DIDs: The estimated long-term wealth effect

T=ni1, i2, , i n1

o : The set of acquirers

C=nj1, j2, , j n2

o : The set of counterfactual firms

(Y1, Y0): The respective observed return of the acquirer, and its counterfactual



Y 1t1i − Y 1t0i



: The observed return growth of the acquirer in the event window

(Y 0t1j − Y 0t0j): The observed return growth of a control firm in the event window

W(i, j): The Kernel weighting function

n2

P

j∈C

W(i, j)(Y 0t1j − Y 0t0j): The estimated counterfactual return growth

The weighting kernel function allows for one-to-many matching under two conditions: (1) the counterfactual’s propensity falls within a certain radius of acquirer’s, and (2) the acquirer and control firms must be in the same common support region to ensure a match for each acquirer With the kernel-based matching mechanism (KBM), the control firm within the radius will be assigned higher weight if its propensity is closer to that of the acquirer Moreover, trimming levels of 2%, 5%, and 10% are undertaken as a sensitivity check for the acquirer and controls stay within the common support

In summary, this paper employs PSM and DIDs to estimate the long-run wealth effect, given its advantages in dealing with selections on both observables (e.g., size, market-to-book, and cash level) as well as “temporal time-invariant” unobservables Such advantages are significant as “the power of event

4 Results and Discussion

4.1 Full Sample Analysis

The DIDs’ estimates illustrate significant negative wealth effects in the course of three, four, and five years after the effective date of the CBMA transaction, and the evidence is consistent for all

effect when the event window is longer The abnormal return is around 26% in the three-year window but could reach more than 70% in a five-year window Thus, if the non-acquirer’s stock

return stays unchanged, the acquirer’s relatively goes down by 26% after three years and down by approximately 70% after five years The manifested evidence is strong, but not uncanny in the literature

window The strong evidence of detrimental wealth effect indicates that the potential synergies in CBMA from emerging to developed nations have never been materialized, or the relating frictions outweigh the synergies of the M&A in the long run

4.2 Subsample Analysis

Further examination of subsamples based on potential factors underpinning the wealth effect

underperforms by 46.18% to 50.84% after four years, while unrelated acquisition underperforms after five years, ranging from 50.76% to 57.79% This evidence is not aligned with the prior expectation that either related or unrelated may provide incremental wealth effects

Also, this paper anticipates that the negative effect may be different in consideration of the payment method However, we find no evidence of positive long-term adjustment Moreover, the non-cash demonstrates a powerful value destruction effect after three and especially five years Specifically,

if the return of a counterfactual group increases by 100%, such a return of the acquirer with non-cash financing increases about 10% at best or possibly stays the same after five years Such strong evidence lends support to the signaling theory because no significant negative abnormal return is observed in the cash-financing subsample

Furthermore, the power of control is unable to overwhelm the overall negative effect, because significant underperformance evidence is observed in the three- to five-year windows The level of negative in this subsample is similar to that in the full sample, indicating that taming of the incomplete contract issues or control of strategic assets is insufficient to defeat the post-integration problems Finally, similar stories unfold for the experience and the structure break No sign of positive effects

is reported, which again highlights the predominance of ex-post integration issues over acquirer’s experience Similarly, positive change in the business environment during the second period of the merger is not yet adequate to create a positive effect

Overall, we find strong evidence of the bidder’s long-term value destruction in all settings, which is consistent with the previous literature However, the special finding is that a variety of potential factors previously shown to be capable of undermining difficulties in M&A were all rendered ineffective

Table 4.Full sample and subsample results

Sample Event Window Spec 1 Spec 2 Spec 3

Panel A: Full sample

3 −0.2613 ** −0.2806 ** −0.2592 **

4 −0.3680 ** −0.3970 ** −0.3538 **

5 −0.6914 ** −0.7141 ** −0.6167 **

Panel B: Acquirers with no prior experience in developed markets

No Exp

4 −0.3992 ** −0.4261 ** −0.4261 **

5 −0.7816 ** −0.8156 ** −0.8156 **

Table 4.Cont.

Sample Event Window Spec 1 Spec 2 Spec 3

Panel C: Related vs Unrelated

Related

4 −0.4730 ** −0.5084 ** −0.4618 **

Unrelated

5 −0.5779 ** −0.5718 ** −0.5076 **

Panel D: Acquisitions NOT funded by pure cash

Non-Cash

3 −0.3983 ** −0.4259 ** −0.3907 **

5 −0.9869 ** −0.9705 ** −0.8913 **

Panel E: Acquisitions for control

Control 50

3 −0.3370 ** −0.3688 ** −0.3464 **

4 −0.3671 ** −0.3960 ** −0.3753 **

5 −0.6675 ** −0.6703 ** −0.6148 **

Minority

5 −0.6105 ** −0.6256 ** −0.6242 **

Panel F: Acquisitions in two merger waves

Before 2003

3 −0.3129 ** −0.3513 ** −0.3359 **

4 −0.4541 ** −0.5226 ** −0.4589 **

5 −0.7514 ** −0.8739 ** −0.7366 **

After 2003

4 −0.3418 ** −0.3790 ** −0.3664 **

5 −0.6088 ** −0.6363 ** −0.5980 **

NOTE: The table reports the average treatment effects on the treated (i.e., wealth effect) in the long-run Specification 1: The default setting where no trimming is made and bandwidth is set to 0.8 Specification 2: 5% of the treated cases are trimmed to drop cases in the off-support region Specification 3: The bandwidth is set to a smaller value of 0.5, meaning that a smaller number of control cases is used in the calculation of the counterfactual outcome ** significant

at the 5% conventional level, generated by the bias-corrected (BC) method in the bootstrapping procedure.

5 Conclusions

This study sets out to examine the wealth effect of cross-border M&A from emerging to developed countries on the acquiring firm Using a comprehensive sample from the 1990–2010 period, we find strong, statistically significant evidence for the negative wealth effects of M&A events The negative wealth effects are consistently estimated in three-, four-, and five-year event windows, and reach approximately −69% after five years This evidence highlights the difficulty to achieve synergies in